On August 1, 2011, the Comprehensive Economic Partnership Agreement (CEPA) between Japan and India became operational, nearly seven years after the negotiations began in 2004. The India-Japan CEPA is the third such agreement that has been concluded (similar agreements were signed with Singapore in 2005 and with Korea in 2009), which covers not only the goods and services trade but also includes areas like investment, competition policy, intellectual property rights and government procurement. However, this agreement assumes more significance since it has two firsts for India: one, it is the first time that India has concluded a bilateral agreement with an industrialised country; and two, it is also the first truly comprehensive agreement concluded by India, given the wide range of issues it covers.
In terms of granting market access opportunities, CEPA requires India to eliminate tariffs on 17.4% of its total tariff lines immediately after the agreement comes into effect. Within a period of 10 years, India would eliminate tariffs on nearly 86% of its tariff lines. Prominent product groups that have been excluded from the tariff elimination process are agricultural commodities and a sizeable proportion of the processed products, plastic products, several categories of non-electrical machinery, and auto and auto components. This, in other words, implies that most of the products in which India needs to protect the interests of the domestic producers will continue to be shielded from import competition.
On the other hand, Japan has agreed to eliminate tariffs on 87% of its tariff lines immediately. Over the next decade, Japan would have removed import tariffs on nearly 97% of the tariff lines. Benefiting from the tariff elimination commitment made by Japan would be marine products, fruits, alcoholic beverages, and textile and clothing products. Many of these products have had higher tariffs in the past, thus impeding access to the Japanese market.
The inclusion of the services sector in CEPA provides opportunities for service providers from India to establish their presence in the Japanese market. In sectors like architectural services, and computer and related services, Japan has gone beyond the offers it had made in the on-going Doha negotiations for opening its markets. What is particularly significant for India is that professionals would benefit from the ease of access to the Japanese market as a result of CEPA.
While reduction in the barriers to trade in both goods and services would bring advantages for both India and Japan, the biggest change that CEPA would usher in is the change in the perception regarding the bilateral economic engagement between the two countries. Over the past decade and a half, India-Japan trade has been low-key and, as a result, the relative significance of Japan as a trade partner has declined quite rapidly. In 1996, Japan was India?s fourth largest trade partner but, by 2010, it was not even among its top 10 trade partners. From India?s perspective, this declining importance of Japan as a trading partner meant that it was unable to register its presence in what was, until recently, the second largest economy.
The lack of any serious economic engagement between India and Japan during this phase also meant that India did not appear prominently on the radar screen of Japanese investors. Flows of Japanese investment have been modest as compared to those that several emerging economies, in particular the members of the Association of South East Asian Nations (Asean), were able to attract. More importantly, these countries became part of the global value chains (GVCs), which developed as Japanese firms modified their business strategies. The GVCs not only allowed the countries to focus on activities in which they had a comparative advantage, they also brought with them two large pay-offs. In the first place, the GVCs necessitated the development of high quality infrastructure that would enable adherence to the ?just-in-time? practice of the Japanese investors. This development led to the second pay-off, namely, the closer economic integration of the region, which has largely been instrumental in transforming Asean into one of the growth poles of the global economy.
However, the most significant impact of this economic entente between India and Japan is likely to be the development of a dynamic Asian region through the East Asia Summit process. The East Asian Summit, which from 2005 has brought Asean nations and six other countries (India, Japan, China, Korea, Australia and New Zealand) together, with a vision to develop closer integration between the member countries, depends critically on India and Japan to provide the strategic balance to the grouping in the face of the steadily increasing economic influence of China. Adding substance to the East Asia Summit process was the report on the Comprehensive Economic Partnership for East Asia (CEPEA), which argues that economic cooperation, facilitation of trade and investment, and liberalisation of trade and investment would provide the wherewithal for deepening economic integration, narrowing development gaps, and achieving sustainable development. With the western economies facing an uncertain future, CEPEA has become more relevant than ever. Successful implementation of the India-Japan CEPA should, therefore, be seen as the much-needed fillip for setting CEPEA in motion.
The author is director general, Research and Information System for Developing Countries, New Delhi